Teradata currently trades at $30.59 per share and has shown little upside over the past six months, posting a small loss of 3%. The stock also fell short of the S&P 500’s 8.1% gain during that period.

Is now the time to buy Teradata, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.

We don't have much confidence in Teradata. Here are three reasons why we avoid TDC and a stock we'd rather own.

Why Do We Think Teradata Will Underperform?

Part of point-of-sale and ATM company NCR from 1991 to 2007, Teradata (NYSE:TDC) offers a software-as-service platform that helps organizations manage their data across multiple storages and analyze it.

1. Declining Billings Reflect Product and Sales Weakness

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Teradata’s billings came in at $396 million in Q3, and it averaged 1.4% year-on-year declines over the last four quarters. This performance was underwhelming and shows the company faced challenges in acquiring and retaining customers. It also suggests there may be increasing competition or market saturation.

2. Revenue Projections Show Stormy Skies Ahead

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Teradata’s revenue to drop by 4.1%, a decrease from its 2.4% annualized declines for the past three years. This projection is underwhelming and suggests its products and services will see some demand headwinds.

3. Low Gross Margin Reveals Weak Structural Profitability

For software companies like Teradata, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Teradata’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 61.1% gross margin over the last year. That means Teradata paid its providers a lot of money ($38.93 for every $100 in revenue) to run its business.

Final Judgment

We cheer for all companies solving complex business issues, but in the case of Teradata, we’ll be cheering from the sidelines. With its shares lagging the market recently, the stock trades at 1.7× forward price-to-sales (or $30.59 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are better stocks to buy right now. We’d suggest looking at The Trade Desk, the nucleus of digital advertising.

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